Summary
The Ninth Circuit affirmed the dismissal with prejudice of a securities fraud action against Yelp Inc. and related defendants. The court held that consumer complaints alleging review manipulation, without a subsequent disclosure or investigation establishing fraud, did not adequately plead loss causation, and that insider sales without historical trading data did not establish a strong inference of scienter. The court also affirmed dismissal of the related control-person claim and concluded that further amendment would be futile.
Topics
Practice areas
Questions Presented
- Whether allegations that the disclosure of consumer complaints concerning possible review manipulation caused a decline in Yelp's stock price adequately pleaded loss causation under the federal securities laws.
- Whether allegations of insider stock sales, management's general awareness of Yelp's operations, and consumer complaints created a strong inference of scienter under the PSLRA.
- Whether the derivative control-person claim under Section 20(a) survived when the underlying Section 10(b) claim failed.
- Whether the district court properly denied further leave to amend and dismissed the complaint with prejudice because amendment would be futile.
Holdings
- Disclosure of customer complaints alleging fraud, without a subsequent investigation or other disclosure of actual wrongdoing, is insufficient under the circumstances of this case to plead loss causation.
- Allegations of substantial insider stock sales do not create a strong inference of scienter without particularized allegations concerning the insiders' prior trading history or other facts showing that the sales were dramatically out of line with prior practices.
- Corporate management's general awareness of the company's day-to-day operations, combined with generalized allegations about review practices and consumer complaints, does not establish scienter absent specific allegations that particular defendants received information related to the alleged fraud.
- The Section 20(a) control-person claim fails because the underlying Section 10(b) securities-fraud claim fails.
- The district court did not abuse its discretion by denying further leave to amend and dismissing with prejudice because amendment of the loss-causation allegations would be futile.
Key quotations
“We hold that in the circumstances of this case disclosure of customer complaints that refer to allegations of fraud, without more, are insufficient to allege loss causation.” (875 F.3d at 1225)
“For sales of stocks to be suspicious, they must be “dramatically out of line with prior trading practices at times calculated to maximize the personal benefit from undisclosed inside information.”” (875 F.3d at 1227)
“Plaintiffs did not adequately plead loss causation and scienter.” (875 F.3d at 1231)
Factual background
Yelp publicly described reviews on its website as firsthand and authentic during the class period. After a Freedom of Information Act request, the Federal Trade Commission disclosed more than 2,000 business complaints alleging that Yelp manipulated reviews in connection with advertising, and a Wall Street Journal article reported on the disclosure and a decline in Yelp's stock price. Plaintiffs alleged that the disclosures revealed the falsity of Yelp's statements and caused their economic loss, while also relying on insider stock sales and management's alleged knowledge to plead scienter.
Procedural history
The district court consolidated two cases and appointed the City of Miami Fire Fighters’ and Police Officers’ Retirement Trust as lead plaintiff. It dismissed the original complaint with leave to amend, then dismissed the first amended complaint, denied further leave to amend and denied reconsideration. Plaintiffs timely appealed.